I got a question from a reader about pricing several months ago and thought I’d share my perspective on the topic.
The wrong way to price a product or service is to take your cost and add a percentage of profit that you want to make on that product. This approach is often called cost-plus pricing. Sam was in a competitive market for dry cleaning services and wanted to gain more business from his competitors so he figured he could add 20% to his cost, and he would make plenty of money by undercutting the competition.
The problem was that he was offered a very high-end cleaning service for dirt low price.
After a few months, he saw that he was losing money, and he couldn’t understand why. So we deconstructed what he was doing.
How to Price a Product or Service
First, he didn’t understand all his costs. He was focused only on direct expenses but forgot that he wanted to hire people eventually to do some of the work he was doing. He had to build into his pricing a reasonable hourly wage so that he could hire employees and build that into his pricing model.
Second, by offering a gold standard service, his customers didn’t expect to get such good results at such cheap prices, so he attracted a lot of customers. Unfortunately, with the ever customer, he kept losing more money. And his brand was confusing to his audience.
Third, he hadn’t thought about what signal a price plays in attracting the audience you want to reach. A Cabernet that sells for $6.99 sets a different expectation than one at $19.99. The same is true of a $300 computer versus one for $1,200.
The Experiment
We created a small market test for his stores. He had four stores in one city. At one location, he changed the name of his store as if it was under new ownership. And he tripled his prices. What he learned over three months was that he started to attract customers who cared deeply about the care of their garments. They wanted to buy this service from someone who took exceptional care and paid close attention to detail. Although his traffic dropped in half, his profits grew by 90%.
He realized that he was attracting the wrong audience with a cost plus approach at his other locations, so he switched to his new brand at the other stores and learned a powerful pricing lesson.
Matching Price to Expectation
Consumers anchor a price based on the good, better and best model. You don’t walk into Wal-Mart and expect to pay $1,000 for a blender. But if you walk into William Sonoma, that wouldn’t surprise you to see a blender at that price.
Markets have segments, and some shoppers are looking for deals while others are looking to solve problems with a commensurate service.
[Tweet “When your pricing is disconnected from your brand promise, you have a problem.”]
Consumers also make shopping comparisons quickly. A new tech gadget gets compared to something else and that something else can be an anchor. I recently heard the story of a new high-end digital picture frame that is both elegant in design and built with 2016 technology. All your iPhone photos show up on this frame through a simple app.
In pricing research with consumers, they found that many people were anchoring this product against an iPad. An iPad can do many things whereas this product only had one function. The product was price, in the research so high that consumers were turned offed because they were contrasting it with a referenced product.
What is your product or service being compared to?
In the case of the dry cleaner, he was obviously being compared to other stores in his community. But he quickly realized that he wanted to anchor the experience like a higher-end department store (Nordstrom’s) with a level of service and product quality that could command a higher price.
In the case of this expensive picture frame, the marketers needed to find other referenced products to help frame the consumer’s price expectation. Where and how they sell it can help – maybe the name can alter that image too.
The advice I give on price to clients is to get clear on who you are targeting with your product or service and price accordingly. Don’t sell caviar to folks who want Slim Jim’s. Conversely, don’t try and sell discount caviar to people who want high-end products.
When you get this right, it is priceless.
Do you feel like you are often taken to the cleaners? Let’s talk price. Text me at 919 720 0995.
Photo Credit: https://en.wikipedia.org/wiki/Laundry
